The glories of a little bit of inflation

The consumer price index jumped 0.7% (seasonally adjusted) in June, the biggest monthly rise since last summer. Most of the gain came from rising gasoline prices: the CPI excluding food energy (what they call core inflation) was up only 0.2%. And prices overall are still down 1.4% from a year ago. This ain’t no inflationary spiral. But with yesterday’s report that producer prices were up 1.8% for the month—well above most forecasters’ expectations—the CPI news makes it apparent that it’s no deflationary spiral either.

It was the belief of the brilliant (if somewhat nutty and sometimes laughably wrong) economist Irving Fisher that what made the Great Depression so great (meaning terrible) was deflation. Falling prices and wages turned a downturn into a total meltdown because businesses and consumers couldn’t pay back debts incurred back when prices were higher. Fisher’s Debt-Deflation Theory of Great Depressions was partly resurrected by Milton Friedman in the 1960s, and it has been at the heart of the Ben Bernanke’s crisis-fighting approach over the past couple of years. The basic idea is that if you fend off deflation, you fend off complete economic disaster.

All indications are that deflation has been successfully fended off—so far, at least. It was in July of 1930, nine months after the stock market crash of October 1929, that the Great Depression’s Great Deflation began, with the annualized inflation rate plummeting to -4.05% from -1.75% the month before. (The rate eventually got to -10.74%, in October 1932.)

Of course, there’s a very real risk that today’s deflation-fighting obsession will eventually lead to high inflation. But it seems a bit crazy—unless you’re trying to figure out what price you’re willing to pay for 30-year Treasury bonds—to obsess over that just now.